What does the Bank of England’s interest rate hike mean to you? | bank of england
The Bank of England has voted to raise interest rates by 0.5 percentage points to 1.75% as the UK struggles to prevent inflation from spiraling out of control. We take a look at what this means for your finances.
So what does this mean for mortgages?
It depends on what kind of deal you are on. Most borrowers are on fixed rate mortgages, and so for now at least they are sheltered from the impact of the latest interest rate hike.
However, banking body UK Finance says around 21% of households are variable rate – either a trailing mortgage, where the rate you pay is explicitly linked to the Bank’s base rate, or the standard variable rate ( SVR) from their lender.
About 800,000 borrowers have a follow-on mortgage, while about 1.1 million are on an SVR.
A follow-on mortgage will directly track the base rate – the fine print on your mortgage will tell you how quickly the hike will pass through, but next month your payments will likely increase and the additional cost will fully reflect the base rate hike.
On a 2.5% tracker, the interest rate would rise to 3%, adding £38 a month to a £150,000 repayment mortgage with 20 years remaining.
With SVRs, things are less straightforward: these can change at the discretion of the lender, but many people will likely see an increase in their monthly costs. However, banks and building societies are likely to come under pressure to pass on none of the latest increase, or only part of it, to their SVR borrowers. Some lenders may not immediately declare their intentions, or may say that any increases will not take effect for a few weeks or more.
So people who have fixed rate mortgages don’t have to worry?
Some with fixed rate deals due to end later this year or early next year are likely to be very worried, mainly because the price of new fixed rate mortgages has skyrocketed over the past few years. last months.
Overall in the UK there are just under 9 million outstanding residential mortgages, 75% of which are fixed rate, according to UK Finance.
In total, approximately 1.3 million fixed rate mortgage transactions are is set to end in 2022, although this of course includes a number that has expired since January and where in many cases a new deal will have already been agreed.
Over the past few years, the vast majority of people who take out mortgages have chosen to lock in their payments, primarily because fixed rates were so competitive, but more recently to protect themselves from rising interest rates.
“Everyone has been fixing for years,” said David Hollingworth, managing partner at brokerage firm L&C Mortgages. He estimated the proportion of customers who opted for a solution at 90-95%.
Two- and five-year deals are traditionally the most popular, while there has been an increase in demand for 10-year fixes, so some people will be protected from rising interest rates for a while , but those whose deals end very soon may be in for a shock.
An analysis by L&C Mortgages found that the lowest average two- and five-year fixed rates were 3.46% and 3.5% respectively. That’s up sharply in January when the numbers were 1.34% and 1.55%.
This means that a borrower who takes out a 25-year repayable mortgage of £150,000 at the current two-year average rate would face monthly payments £159 higher than those paid by someone who signed an equivalent agreement in January. . Over a year, that’s an additional £1,908.
What about first-time buyers?
They were very affected by the issue of more expensive offers described above. On top of that, house prices continued their relentless rise: On Tuesday, Nationwide said the annual rate of house price growth accelerated to 11%.
Data from property website Rightmove indicates that the combination of more expensive mortgage deals and rising house prices means that the average monthly mortgage payment for a new first-time buyer is £976 per month. month. That’s 20% more than in January when it was £813 a month. If the 0.5% rise in interest rates is reflected in the pricing of the new fixed offers, it would push the amount of monthly payments up to £1,030.
What about those who are having difficulty paying their mortgage?
The most recent data on UK finances, dating back to late March, paints a mixed picture.
The total number of customers in arrears on their mortgages continued to decline in the first quarter of this year. At the end of March, there were 75,670 homeowner mortgages in arrears at 2.5% or more of the loan outstanding. That compares to 79,620 in the last three months of 2021 and 84,010 in the first three months of last year.
But at the same time, foreclosures have increased: 580 properties mortgaged by owners and 370 rental properties were taken in the first three months of this year, compared to 390 and 320 in the previous quarter.
However, UK Finance said foreclosures had ‘increased from a low base’ as courts continued to deal with a backlog of cases that had built up during the pandemic following a moratorium on possession which ran from March 2020 to April 2021. In the first three months of 2019, almost 1,400 properties mortgaged by owners were taken into possession.
During the pandemic, millions of mortgage, credit card and personal loan borrowers have been granted payment holidays, which has helped some struggling people.
The banking body said lenders continued to provide tailored forbearance and support to borrowers who needed help.
What about loans and credit cards?
Most personal loans are fixed rate, just like most car financing, so if you have an unsecured loan, you must continue to pay it back as agreed.
Credit card rates are variable but are generally not explicitly linked to the base rate, so they will not increase automatically, although they have increased in recent months.
The cost of living crisis is forcing people to use their credit cards more and take out loans to pay their bills, according to Laura Suter, personal finance manager at investment firm AJ Bell.
Bank of England data released last week showed people borrowed a further £1.8bn in consumer credit in June. Households charged an additional £1bn on their credit cards, along with an additional £800m on car dealer financing, personal loans and other forms of credit.
But that’s good news for savers, isn’t it?
Savers have been the losers of years of falling interest rates and are finally seeing savings rates rise. Last month, NS&I (National Savings & Investments) raised interest rates on several of its products.
In response to previous base rate increases, account providers have raised some rates, although often not in line with the Bank’s decision.
But even if the latest increase is fully passed on, rising inflation – currently at 9.4% and set to rise – is eroding the value of people’s nest eggs.
Meanwhile, annuities – products offering guaranteed income for life in exchange for a lump sum – have risen in value as interest rates have risen, and are expected to improve further.
How could real estate prices be affected?
The housing market has been fueled by cheap mortgages, so increases in the cost of borrowing are likely to have an impact.
Nationwide said this week that while there were tentative signs of a slowdown in activity, with a drop in the number of mortgage approvals for home purchases in June, it had yet to been passed on to price growth. But that could start to change.
Meanwhile, a key mortgage affordability test was dropped by the Bank of England this week which could mean thousands of potential buyers are able to secure a bigger home loan. Making it easier for some people to access the property ladder could boost the housing market.